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Tax Debt Options and Help
If you cannot afford to pay your IRS tax debt in full when it is due, then you will be left with five options for resolving your tax debt:
- Offer in Compromise: an agreement to settle the debt with the IRS for less than is owed via a lump sum payment or a brief installment plan.
- Installment agreement: a monthly payment plan for the full balance of the IRS debt.
- Partial payment installment agreement: a monthly payment plan for a portion of the tax debt.
- Currently not collectible: an agreement by the IRS not to seek collection of a tax debts for a specific period of time.
- Bankruptcy: an order to discharge all or part of your IRS debts under Chapter 7 or to make payments or not, per the ruling of the bankruptcy court in a Chapter 13 bankruptcy.
IRS Offer in Compromise
You have probably seen ads on television that promise help to settle tax debts with the IRS for 'pennies on the dollar,' through the IRS Offer in Compromise (OIC) program. Despite the claims in the ads, a successful offer-in-compromise is not simple or common. Not everyone who submits an OIC qualifies. In order to qualify for an OIC, a taxpayer must be in a financial hardship and the taxpayer must be able to demonstrate to the IRS an inability to repay the debt within the remaining time the IRS has to collect on the debt. The proof of the financial hardship is based on an examination of the taxpayer's household income, monthly IRS allowable living expenses, and the assets in the taxpayer's name.
Even if a taxpayer qualifies for an OIC, the amount that the IRS will accept in a settlement depends on how accurately the OIC documentation is prepared. Only about 15% of OIC applications that are submitted by individuals are approved by the IRS. The success rate of competent tax professionals, however, is much higher. This is due, in large part, to a professional not submitting a case that does not meet the OIC standards. OICs are not a speedy process. Most cases take over a year to move through the bureaucratic IRS system from start to finish. IRS rules require the IRS to decide within two years from the date of submission of the OIC. If they do not finalize an answer within two years, the OIC is automatically accepted. If you feel that you cannot afford to pay your tax debt, contact a tax professional with a proven record of successfully negotiating IRS offers in compromise.
IRS Installment Agreement, Full or Partial
If you do not qualify for an OIC and the IRS deems that you are able to pay all or most of your tax obligation, you may want to consider an installment agreement. An installment agreement allows a taxpayer to spread the repayment of the tax debt over a period as long as 5 years. Individuals who owe less than $25,000 can often apply for these themselves, if they are able to pay all debts (and the interest that will be added on) in full, within five years. A tax professional should help you if you feel you cannot pay the debt in full in five years, wish to apply for a partial installment plan, or owe more than $25,000 to the IRS. Once the tax debt is over $25,000, the IRS no longer offers the option of paying the debt within five years. The IRS becomes more aggressive in its collection efforts for a debt over $25,000, demanding a payment that leaves the taxpayer only with enough money to cover basic living expenses. Again, having a tax professional advocate for you can be the best way to obtain the smallest monthly payment plan.
Currently Not Collectible
If you do not qualify for an offer in compromise or qualify for an OIC that will require you to pay back more than you can afford because of assets you own, a tax professional can help you apply for Currently not Collectible (CNC) status. CNC is a good option for you if you have low cash flow but own valuable assets. If you own property with equity, cars with equity, or a retirement account, the value of your assets may have prevented you from a successful OIC, but CNC is based only on your monthly cash flow. (The IRS can force a person to liquidate easily liquidated assets such as savings accounts, stocks, bonds, and mutual funds accounts, before granting CNC). Under CNC, the statute of limitations continues to run and the IRS suspends all collection efforts for a limited time. The IRS will periodically review your finances with you. If your financial situation improves, the IRS will revoke the CNC status and resume active collection efforts. If the IRS grants you CNC, they are going to file a tax lien against you. We would recommend hiring a professional tax expert to help get you into a CNC status.
You should consider applying for CNC status with the IRS if:
- Your income is lower than your allowable expenses and this is unlikely to improve in the future
- Your income is lower than your allowable expenses and the statute of limitations will soon expire.
Bankruptcy and the IRS
Some IRS tax debts may be discharged under a Chapter 7 bankruptcy or included in a Chapter 13 bankruptcy. In order for an IRS tax debt to be discharged it needs to meet three basic rules. The tax debt has to be due for three years, the tax filing has to be filed for two years, and the tax assessment has to be in place for at least 240 days. Also, not all types of IRS tax debts are eligible for inclusion in a bankruptcy chapter 7. For instance, 1040 income tax debt is eligible for inclusion, but payroll tax obligations are not. If you are considering bankruptcy and have IRS debt, contact an experienced bankruptcy attorney for help and make sure to review the tax debt options with your attorney.
IRS Statute of Limitation
The IRS has 10 years from the day the tax liability is finalized to collect it. A tax liability can be finalized as a balance due on a tax return, an assessment from an audit, or a proposed assessment that has become final. If the statute of limitations has expired, the IRS must cease all collection attempts and the tax liability is erased. The collection statute can be extended beyond 10 years, if you file for bankruptcy. The clock stops ticking on the collection statute while you are under the protection of the bankruptcy court or during the time that the IRS is reviewing your Offer-in-Compromise submission.
Seek Professional Help for IRS Debt
Because of the complexity of the offer-in-compromise and most other IRS tax debt processes, as well as the potential severity of the IRS' collection efforts, you should hire a tax professional to help you prepare your IRS documentation and to negotiate with the IRS on your behalf. In order to legally represent you and to contact the IRS on your behalf to help you, the tax professional must meet certain standards. Qualified professionals include licensed attorneys, enrolled Agents (EAs- people who have passed a rigorous federal examination), or Certified Public Accountants (CPA).
Taxpayers should look for a tax professional with years of experience in IRS collection matters, especially experience in dealing with revenue officers, the Automated Collection Systems division, and the complex IRS process. If you have an IRS tax debt, explore all of your options. It is crucial for you to understand the full extent of your tax problem, factoring in the penalties and interest the IRS tacks on month to month. It is also important to be fully informed about all IRS collection efforts, so you can protect yourself as best as possible from IRS levies, liens, or wage garnishments. It is best to contact the IRS or an experienced tax professional for debt help as soon as you receive a notice or aware that you are going to have a tax problem.